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Achieving Financial Independence On A Modest Income

Median Salary By Age And Sex In America
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There are some people who think that achieving financial independence before 65 is only for people with high incomes. Complainers will go on and on about how it’s not fair that other people are able to escape the rat race early, while they’ve got to grind on because they’re earning less than six figures a year.

News flash! Nothing good comes easy! You’re either going to bitch and moan about why life is not fair or you’re going to do something to better your situation. In a world where you can only depend on yourself for retirement, having a weak money mindset is devastating for your financial future.



Let me share with you a story about some dude who was able to save for retirement while earning a modest $40,000 a year in Manhattan, New York, the most expensive place in America. It can be done folks, and I’ve got the budget to prove it.

Achieving Financial Independence On A Modest Income

Imagine being 22 years old and finally landing your first job in finance. You thought you were going to be rich working at a prestigious investment bank, but nope! They send you an offer letter in the mail for $40,000 a year.

What the heck? $40,000 in Manhattan is like earning $16,500 in Austin, Texas. Here are the cost of living salary equivalents for other major cities in America:



$26,330 – Washington DC Area

$31,893 – San Francisco

$25,554 – Seattle

$24,255 – San Diego, CA



$24,349 – Los Angeles, CA

$20,394 – Chicago, IL

$19,100 – Miami, Florida

$18,766 – Philadelphia, PA



$16,600 – Phoenix, Arizona

$16,100 – Houston, TX

$40,000 is a fine salary, but you’re not exactly living it up when it costs around $1,000 to rent a room and $6 to get a watered down beer at a bar.

When I was making $40,000 a year, a regular day would start at 5:30am and end at 7:30pm. I’d then have to work another 5-8 hours on the weekend. When you add up all the hours a week, a $40,000 a year salary equated to earning only about $10/hour.

Because I realized after two weeks on the job I couldn’t last working such long hours for decades, I logically decided to save as much money as possible to give my future self options. I knew achieving financial independence wasn’t going to be easy.

$40,000 Salary Budget Breakdown



Below is my detailed budget breakdown when I was earning $40,000 a year living in Manhattan. Take a look and I’ll explain more below.

Achieving financial independence on $40,000 a year living in Manhattan

Saving For Retirement

Back in 2000, the maximum you could contribute to your 401(k) was $10,500 a year. After a month of working, I got educated about the importance of retirement savings so I elected to deduct 30% from each paycheck to go to my 401(k). Once the maximum was hit, the contribution stopped.

By taking money off the top first, it was easier to adjust to a $28,000 gross salary. It also felt good that I didn’t have to pay a 28% federal tax rate on the $10,500 either.

With $10,500 a year in pre-tax savings and another ~$2,200 a year left in after-tax savings, I was saving a blended ~31% of my gross income.

The retirement savings mistake I made back then was not also contributing $2,000 a year to an IRA. However, I did end up using all my after-tax cash flow to invest in stocks, one of which did very well.

Was I financially independent while making $40,000? Heck no! But I did the math and knew that if I kept on saving at least $12,000 a year for the next 10 years, by the time I turned 32, I should have at least $150,000 with a 7% compound rate of return.



Achieving financial independence took tracking everything down to the penny with an Excel spreadsheet at the time. Today, I just use free technology to track all my accounts in one place.

Housing Costs ($920/month)

While many of my fellow financial analysts decided to rent a one bedroom for $2,100+/month (with the help of their parents) or split a two bedroom for $1,300/month each in a nice part of Manhattan, I decided to split a studio with my high school buddy down in the dead zone.

Our studio was at 45 Wall Street, a 10 minute walk to 1 New York Plaza where I had to get in by 5:30am every morning. The traders and sales-traders would arrive by 6:30am, so I had to prepare as much printed research material about what went on overnight by the time they got in. Oh, how I remember the stress fixing photocopy machines!

By living close by to work, I not only was able to save time, but transportation money as well. I sometimes fantasized by taking a nap back home during my lunch break, but that never happened.

Even during the depths of winter, our utility cost never got much higher than $40. When you’re living in a small space, it’s so much cheaper to heat. Besides, we were hardly ever home.

We didn’t have time to watch cable TV. There was no such thing as wifi or streaming services back then as well. All I did was come home to a mattress on the ground and pass out. Drastically minimizing housing costs, makes saving for retirement much easier.



Getting your housing costs down is probably the easiest way for achieving financial independence.

Food & Drinks ($300/month)

A great way to incentivize worker bees is to offer free cafeteria access once you work past a certain hour. Because I didn’t have a lot of leftover cash flow, I would always stay until 7:30pm and gorge myself with whatever was on the menu that day at 85 Broad Street.

After filling myself up, I’d “steal” some fruits and mini cereal boxes to feed myself free breakfast the next day. There was always random free food in the office I could eat. It was part of the culture that if an employee closed a deal or got a big trade to buy lunch for their team or the floor.

Despite the ubiquitous free food that got me fat, I still had a ~$300/month food and beverage bill because I’d occasionally go out with colleagues. When you go out with friends and colleagues, it’s customary to buy at least a round of drinks. I didn’t want to be seen as a cheapskate, even though I had a thin financial cushion.

Vacation & Entertainment ($600/year)

Given I was working so much, I didn’t take any vacations my first year because there was so much to do and learn. If I got an entire weekend off, that counted as my vacation. Only after the second year did I fly back to Hawaii to see family.

During my weekends off, I’d go watch a movie in the theatre, go out for dinner, catch an occasional cheap ticket play, or go to some free event in Central Park.



My firm did have the occasional analyst appreciation outing where they’d take us to watch the Yankees or take us to some restaurant close by. But there was never anything fancy or special.

A Simple Life Was Just Fine

Even though my budget looks pretty boring and maybe even a little sad, I was simply too busy at work to spend money on anything else. To pay up for a nice apartment felt stupid because I was hardly there. To go clubbing or get bottle service at a fancy lounge with my fellow analysts would only limit my options in the future.

Yes, I wanted to go to the Hamptons during the summer and go on European vacations like my colleagues. But I wanted to reach at least a 50% savings rate before I partook in such festivities. I had my whole life ahead of me to enjoy. There was no rush. Besides, may of my classmates had family money.

My #1 focus was achieving financial independence at a young age. Work was too miserable to go on for decades.

$40,000 Is Just OK

Yes, $40,000 back in 2000 went further than $40,000 does today. If you want to adjust the numbers into today’s dollars, you can increase the salary and all other city salary equivalents by about 35% assuming a 2% compound rate of return for 17 years.

Although, many folks have seen their wages stagnate due to two recessions, globalization, and gains in productivity growth. See median income chart below by the St. Louis Fed.

Real median household income in America
Real median income hasn’t gone much higher since 2000

But I argue that earning $52,000 – $57,000 in Manhattan (= ~$23,000 – $25,000 in Austin, TX) is still quite lean. You’d probably have to move to one of the outer boroughs with multiple roommates to save money for retirement. However, when you have to get in at 5:30am, spending an extra 30+ minutes commuting could be unbearable.



I knew that the rough times wouldn’t last forever because there was upward mobility. If I could just survive in the industry for 10 years, I would make more because the normal trajectory in finance and in most occupations is for people to get promoted over time. So long as I could stay frugal while I made more, financial independence was an inevitability.

There is no sacrifice when the reward is 1,000X.

Advice For Modest Income Earners Wanting FIRE

1) Live in a crap box. 

Be honest. If you have an entire room to yourself, you are living large. In US colleges, most students have dorm mates. In China, each college dorm room has bunk beds for 4 to 8 people. If you are a family of three living in a two bedroom apartment or larger with more than one bathroom, life is pretty comfortable. There is no reason why you shouldn’t continue living like a college student until you can save at least 30% of your income, if not 50% of your income.

2) Work so much you don’t have time to spend money.

Your 20s are for learning, your 30s and older are for earning. There is so much to soak in that if you’re working 40 hours a week or less before the age of 40, you’re leaving a lot on the table. People everywhere around the world are outworking you because they are hungry to improve their quality of life.

Don’t believe me? Go to any major city in a developing country and witness their work hours for yourself. Taiwan is already a developed country, and only in 2016 did they put into law to limit work days from six days a week (48 hours) to five days a week.

3) Don’t confuse yourself with someone else.

This is a common phenomenon I don’t get. If you only work 40 hours a week, how can you compare your salary to someone working 60 hours a week? No you can’t. If you are 30 years old, how can you compare your net worth to someone who is 45 years old? Of course not. If you work at a nonprofit, why are you comparing your income to someone working in the private sector? Nope. If you dropped out of college, it’s not rational to compare yourself to someone with a graduate degree.

If you aren’t a regular ONIG Financial Blog reader (free newsletter), how can you compare yourself to those who have been reading FS since 2009? It’s not possible. If you must compare, then compare yourself to people with similar backgrounds. Just know that comparison tends to lead to misery. If you want to aspire, eliminate the jealousy and learn from others who are doing things differently.

4) Max out all pre-tax retirement accounts.



You will adjust to your lower gross income because you will find a way to make things work. We get in trouble when we decide our lifestyle expenses first, and then figure out how much we can save after. If you max out your 401(k), then you’ll always know that you’re building at least that much for your retirement. In 10 years, I promise you will be happy you did.

5) Ask yourself what’s wrong with making more.

Unless you are a terrible employee with low self-esteem and a disability, your earnings trajectory should be up and to the right along with inflation. You don’t expect the stock market or the real estate market to stay the same price forever do you? Neither should you expect your salary to stay stagnant with more experience and expertise.

If you can’t make more from your job, find another job. Don’t be stuck doing something that’s not rewarding. If you can’t make more by finding another job, freelance after work. The freelance industry is booming now. If you can’t make more money freelancing after work, start your own online business. I don’t regret starting back in 2009.

If you can’t start your own online business, be a rideshare driver. Don’t be too proud to get your hands dirty. If you can’t be a rideshare driver, be a Tasker. If you get shut out at the thousands of online gig jobs you can do, find a wealthy partner or tell him or her to get hustling!

Keep Fighting

Saving for retirement and achieving financial freedom is tougher with a lower salary no doubt. But the good thing about having a low salary is that you have more upside! This is where having an abundance mindset really helps.

If you can control lifestyle inflation, you’ll do just fine. It’s those who keep spending at the pace of their income increase that get in so much trouble.

Instead of complaining about higher income folks achieving financial independence sooner than you, expend your energy trying to improve your own situation.

Recommendation To Grow Wealth

Achieving financial independence takes discipline. Sign up for Personal Capital, the web’s #1 free wealth management tool to get a clear overview of your investments. Not only will you see how your net worth is allocated, you can also get a better handle on your retirement cash flow needs and more.

The more you can stay on top of your finances, the better you can optimize your wealth. I used to use an Excel spreadsheet to track every line item each month, but now, Personal Capital will automatically track my wealth for me.

Personal Capital Asset Allocation
Log onto dashboard and click Investing -> Holdings to get an overview of all accounts

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